AtkinsRéalis Group Inc. (ATRL) Earnings Call Transcript & Summary

Good morning, and welcome to SNC-Lavalin's Fourth Quarter 2022 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Denis Jasmin, Vice President, Investor Relations. Please go ahead.

Thank you, Ariel. Good morning, everyone, and thank you for joining the call. Our Q4 earnings announcement was released this morning, and we have posted a corresponding slide presentation on the Investors section of our website. The recording of today's call and its transcript will also be available on our website within 24 hours. With me today are Ian Edwards, President and Chief Executive Officer; and Jeff Bell, Executive Vice President and Chief Financial Officer. Before we begin, I would like to ask everyone to limit themselves to 1 or 2 questions to ensure that all analysts have an opportunity to participate. You are welcome to return to the queue for any follow-up questions. I would like to draw your attention to Slide 2. Comments made on today's call may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties and as such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company's relevant filings on SEDAR. These documents are also available on our website. Also during the call, we may refer to certain non-IFRS measures and ratios. These measures and ratios are defined calculated and reconciled with comparable IFRS measures in our MD&A, which can be found on SEDAR and our website. Management believes that these non-IFRS measures provide additional insight into the company's financial results and certain investors may use this information to evaluate the company's performance from period-to-period. And now I'll pass the call over to Ian Edwards.

Thank you, Denis. Good morning, everyone, and thank you for joining us today. 2022 was a good year for SNC-Lavalin as we achieved many of the goals we laid out at the beginning of the year. The tireless effort of our 34,000 employees worldwide is what drives the company every day. Our core purpose is engineering a better future for the planet and its people, and we're only able to do so through the hard work and dedication of our employees. I can't thank them enough. On Slide 3, we outline our accomplishments against our pivoting to growth strategy that we introduced during our Investor Day in 2021. As a reminder, our goal was to wind down our LSTK projects and pivot into growing our SNCL services businesses in our chosen geographies to drive long-term value creation. 2022 was a year of strong progress against this strategy. We are now largely physically complete on our 2 Ontario LSTK projects, and we remain on schedule to hand these over to clients in 2023, and REM continues to progress well. We expect that this will result in positive free cash flow in the second half of the year. We also remain focused on pursuing all monies owed due to the increased project cost. We continued to grow our engineering services business, expanding organically our revenue by 9% year-on-year. We achieved record backlog for the third consecutive quarter, as demand for our services remains very strong in our chosen markets. We continue to be recognized as leaders in the nuclear sector. Governments and public entities around the globe are making strides towards a greener power grid and to build new nuclear and SNC-Lavalin is well positioned to win its fair share of these opportunities. We have been intentional in our pivot into specific core geographies at our chosen end markets. Success this past year further emphasizes the strength of our new strategy, and our growth opportunities are unfolding as planned. We continue to believe the strategy put in place represents the best opportunity for SNC-Lavalin, and we expect to continue to deliver on our stated goals. The macroeconomic environment is challenging and is projected to be so for the foreseeable future. But our business model, which is focused on geographies and end markets that we have intentionally chosen remains resilient, driven by public sector's focus on sustainable infrastructure and long-term energy solutions. As we continue to deliver on our strategy, we are undertaking a strategic review to optimize our portfolio of businesses to ensure that capital and human resources are prioritized to the areas of the business with the highest value creation potential. On Slide 4, we highlight our achievements this past year versus our stated targets. Continued demand for our SNCL services, coupled with our focus on operational initiatives across the businesses led us to hit the top end of our target range for organic revenue growth and in the middle of our segment adjusted EBIT to segment revenue ratio range. In 2022, developing our people and attracting new talent was a key focus area. As a result, we successfully grew our headcount by approximately 3,000 people, and we increased our focus on training and development. This resulted in an engagement score of 6% from our previous [ box ] survey done in 2019. While I'm truly proud of this achievement, we will continue to focus on employee engagement and the development as we grow SNC-Lavalin. We also continue to grow the sustainability of our operations and are proud to say that our sustainable revenues now represent almost half of our total revenues. In addition, we are partnering and supporting indigenous socioeconomic development in Canada and extended our credit facilities through a sustainability linked framework. We remain on track to deliver our 2030 net 0 road map and our 2025 ED&I targets. Turning to Slide 5. I want to focus on a few of the highlights from the fourth quarter. We ended the year on a strong footing as SNCL services had an organic revenue growth of 7%, if we exclude the positive $93 million outcome from an arbitration and the engineering services in the fourth quarter '21. Segment adjusted EBIT was $156 million and represented a 9% margin. Total backlog for SNCL Services rose to $11.8 billion, which represented a 5% increase year-over-year with a further strong growth in engineering services. During the fourth quarter, segment adjusted EBIT for our LSTK projects was negative $150 million, following what management expects is the last material cost reforecast on these projects. Today, we're introducing the 2023 outlook, which Jeff will provide in more detail shortly. We anticipate SNCL Services organic revenue and profitability to remain strong. And in similar ranges of our latest 2022 guidance. We have largely physically completed our 2 Ontario LSTK projects and are on track to hand these over to clients in 2023. We expect the operating cash flow to be positive in the second half of the year. Turning to Slide 6. Our engineering services business continues to drive robust growth for SNC-Lavalin and delivered strong results again during the fourth quarter. The business remains resilient and is accelerating in our core geographies. As evidenced by the 2% year-over-year organic revenue growth during the quarter or 11%, excluding the $93 million favorable outcome from the arbitration. Our year-over-year improvement highlights our ability to capture growth and provides a clear road map for the growth prospects for sustainable infrastructure demand in 2023 and beyond. Segment adjusted EBIT and EBITDA margins were 9.6% and 16%, respectively, during the quarter at the high end of our target ranges with particularly strong margin performance in the U.K. and the U.S. We achieved a record backlog during the fourth quarter, marking our third consecutive quarter of backlog growth. Backlog now stands at approximately $4.7 billion which represents a 24% increase versus our backlog as of December 31, 2021. The strong backlog increase in the U.S. was achieved through several government contract wins, notably through delivery management services for Hurricane Ian and highway design services. In addition, for further support against future natural disasters, we were recently awarded a design and engineering contract to replace the Shepard Broad Causeway bridge in South Florida, which will increase safety and enhanced hurricane evacuation capabilities. These wins in addition to orders elevated our U.S. backlog to another record level and 30% higher than where we stood as of December 31, 2021. Our outlook for continued growth in the U.S. through our engineering services business remains bright, fueled by infrastructure governmental programs, such as the infrastructure investment and Jobs Act and the inflation Reduction Act. In the U.K., our diverse project portfolio as well as our presence in all 7 of our primary end markets, highlight the resiliency of our demand generators in uncertain economic environments. Our backlog is at an all time high and this past November, the U.K. [ auto ] statement signals a commitment to $600 billion in infrastructure spend, providing good visibility for near-term revenues. Over the past few years, we have focused on improving our position in these growing regions and end markets through digital investments and increased hiring and the use of our global technology center in India, and training all our business development and engineering teams. Results this year and our outlook for the future highlight these investments are proving fruitful and for the long term. Looking out into 2023. Our pipeline remains robust, and we are well positioned to continue growing. I'd now like to move to Slide 7 and the results of our nuclear business. During the fourth quarter, nuclear revenues and segment adjusted EBIT was similar to prior year with a continued uptick in segment adjusted EBIT margin across all geographies. Our backlog stood at $937 million as of December 31, and we saw bookings growth in all of our geographies during 2021. This level represents double-digit growth versus 2021. As we continue to see growth across all of our core geographies, we are also witnessing accelerating activity in each of our core nuclear end markets. We remain bullish on the nuclear sector as several countries around the world continue to make commitments to Net Zero. Government entities in nuclear as a low-carbon way to produce electricity, creating new build opportunities to deliver baseload power into an evolving and greener power grid. We are very excited about our recent award with GE Hitachi to build the Darlington nuclear generation station, small modular reactor. This SMR is the first to be built in North America and could become a game changer for the nuclear industry. This is a great example of the substantial opportunity for our full life cycle services business in our core geographies. Additionally, a recent decision by the U.K. government to fund the size while senior build is another example of our capabilities being in demand for new build opportunities needed to deliver a greener baseload power. We remain active and react to support and life extension projects as indicated by our work in Europe and Canada. In the U.S., there are a number of opportunities with the National Nuclear Security Administration and potential projects that would utilize our learnings from the work we have begun on the Ontario power generation SMR. The high-quality prospects across our 3 nuclear subsectors show the potential growth opportunities happening now for years to come. Our track record and technology expertise has put us in an enviable position, and we continue to make strides to be the partner of choice. Moving to Slide 8 and our O&M segment, which generated $132 million in revenue during the fourth quarter and the 12% organic increase year-over-year. Segment adjusted EBIT margin last quarter was 7.8%, above our long-term target of 5% to 7%. Revenue this past quarter was primarily driven by transit projects, and our LSTK projects move towards operation. We are moving -- we are mobilizing for the OEM startup of REM, South Shore, Eglinton and Trillium. We continue to see opportunity for growth in the U.K. through building and road infrastructure improvements. We're also utilizing our strategic partnerships with key industry players and leveraging our capital group to maximize billing opportunities for future growth in core markets. On Slide 9, our Linxon business revenue was impacted by lower bookings in prior periods in Europe and Asia Pacific, which was only partially offset by significant revenue growth in the Middle East. And as a result, organic revenue decreased 17% compared to the fourth quarter of 2021. We also needed to take an additional charge on certain European projects that were completed or nearing completion to reflect cost reforecast, resulting in a $14 million EBIT loss in the quarter and a $10 million EBIT loss for the full year. We have already taken action to improve profitability of the business and we're also undertaking a further strategic review. Turning to Slide 10 and Capital. Fourth quarter revenues decreased to $49 million and segment EBIT fell to $45 million mainly due to decreased contribution from InPower BC following its disposal in the first quarter of 2022 and lower contribution from InPower assets due to a planned vengeance shutdown. We continue to see opportunities to release value from the capital portfolio. And in the fourth quarter, we exited our investment in a fund of the Carlyle Group. We will continue to assess our portfolio of investments to determine long-term strategic fit and to look to release value where we see opportunities to realize additional value. Our capital concessions remain consistent sources of income for the business, most notably our stake in the Highway 407 ETR, yielded dividends against this past quarter and the amount of $37 million. Looking out, we remain very active on the business development front and progressing on our new strategy and alignment with the O&M segment. Moving to Slide 11 and an update on the LSTK projects. We achieved a major milestone during the fourth quarter as our 2 Ontario projects, Eglinton and Trillium are now largely physically complete, a significant step towards our goal of being a professional services and project management company. Our last project ramp continues to progress well and is more than 75% complete as of December 31. Segment adjusted EBIT continued to be impacted by the macro factors that we've been managing over the past several quarters, including supply chain disruption, elevated inflation and material rates, labor shortages. This led to a full year impact of [$270] million of the $300 million risk envelope we outlined at this time last year to complete these projects. As I indicated earlier, we see this as the last material cost reforecast for the LSTK projects. As was previously outlined, we believe a significant portion of these additional costs related to the pandemic supply chain disruption, inflation and labor strike action is recoverable and ongoing discussions are in progress to recover these losses. With that, I'll now turn it over to Jeff to discuss the financial highlights.

Thank you, Ian, and good morning, everyone. Turning to Slide 13. Total revenues for the quarter were $1.9 billion, in line with last year. Total segment adjusted EBIT for the quarter was $51 million, which was comprised of $156 million for SNCL Services, $45 million for capital and negative $150 million for LSTK projects. SNCL Services adjusted EBIT margin was 9%, in line with our target range of 8% to 10%. The negative EBIT for LSTK projects resulted from recognizing $140 million in the quarter of the $300 million risk on Globe and $10 million, primarily from the segment overhead cost needed to manage the completion of the LSTK projects and pursue the material cost reimbursement claims that management believes we are entitled to under the contracts. Corporate SG&A expenses from PS&PM for the quarter was $24 million, and restructuring and transformation costs were $54 million, mainly due to higher than forecasted noncash charges encouraged to rightsize the office real estate footprint to align with new working practices. Net financial expenses for the quarter were $47 million, higher than last year due to the increase in interest rates experienced during the year and the higher level of gross debt. The IFRS net loss from continuing operations this quarter was $54 million compared to $15 million in Q4 2021 and was composed of a net loss from PS&PM of $91 million and a net income from capital of $36 million. The Q4 2022 adjusted net loss from PS&PM was $33 million or $0.19 per diluted share as a result of the losses in LSTK projects. On Slide 14, you can see the selected financial metrics for the full year. Total revenues for the year increased by 2% to $7.5 billion compared to 2021. SNCL Services revenue totaled $6.6 billion, 4.9% higher than 2021 or 6.8% on an organic revenue growth basis, at the top end of our most recent outlook, and excluding the $93 million positive impact of a successful arbitration outcome in engineering services in 2021, the underlying revenue growth was even higher. Total segment adjusted EBIT for the year was $413 million, which was comprised of $581 million for SNCL services, $93 million for capital and negative $261 million for LSTK projects. Corporate SG&A expenses from PS&PM were $99 million, in line with our outlook of approximately $100 million and we expect a similar level in 2023 as cost efficiency would be largely offset by inflationary pressures. Restructuring and transformation costs for the year totaled $83 million, higher than our original 2022 outlook due to the same reasons I explained for the Q4 variance. We expect these costs to decrease and be around $30 million for the full year 2023, primarily driven by our ERP system implementation and further functional cost transformation. Net financial expenses for the year were $116 million due to the higher debt level and increased interest rates, we expect the interest expense to be higher this year with a quarterly run rate in 2023, similar to that of Q4 2022. IFRS net income from continuing operations was $10 million for the year and the adjusted net income from PS&PM was $113 million or $0.64 per diluted share. Backlog ended the year at $12.6 billion, a similar level than last -- with last year with a roughly $0.5 billion increase in SNCL services backlog being offset by a decrease in the LSTK project backlog as we continue to execute our exit strategy. SNCL Services backlog increased to $11.8 million at the end of the year, which included 24% increase in the Engineering Services segment backlog. This segment was awarded $5.6 billion of [ work in ] the year representing a 1.19 book-to-bill ratio. It is also noteworthy to mention that the nuclear backlog had a very solid fourth quarter with a book-to-bill ratio of 1.4, ending the year at $937 million. If we now turn to Slide 15. At the end of December 2022, the company's net limited resource and recourse debt was $1.3 billion, and the net limited recourse and recourse debt to adjusted EBITDA ratio was 2.9x. While this ratio is above the company's end of 2024 target range of 1.5 to 2x, balance sheet strength and financial resilience remain a core financial priority, and we remain confident that we will be meeting the target at that time. Note that under our credit agreement, the net debt-to-EBITDA ratio is calculated differently. And at the end of 2022, was approximately 2.5x. Due to our continuing efforts on cash collection, our days sales outstanding for engineering services remained strong and stood at 57 days at the end of the quarter. If we now move on to Slide 16 and free cash flow. Net cash generated from operating activities was strong in the quarter and totaled $176 million, driven by SNCL Services EBITDA delivery and improved working capital management, including the reduced DSO level, I just mentioned. As a result, the full year net cash usage from operating activities was $245 million, better than our latest outlook. For the full year, SNCL Services had another strong year, generating cash flows of $552 million, while capital generated $28 million. After cash taxes, interest and corporate items, you can see that we generated $180 million of operating cash flow for the full year. SNCL Projects had an operating cash flow usage of $425 million due to the cash outflows needed for the progression of the remaining LSTK projects. As the 2 Ontario projects have reached a major milestone of being largely physically complete, we expect that the LSTK projects cash outflows will reduce in the second half of 2023 as the supply chain has paid out and testing and commissioning activities wrap up. Therefore, we expect that operating cash flow should be negative in the first half of the year, while they should be positive in the second half of the year. Also note that we continue to actively pursue claims associated with the increased costs we've experienced on the LSTK projects. While it is difficult to forecast exactly when these claims will be resolved, when they do, the related inflow of cash will be incrementally positive to the company's cash position. With the expectation that the operating cash flow profile of the company will improve later this year and the potential for settlements on LSTK claims, capital allocation priorities are aligned with our 2021 Investor Day framework. We remain committed to ultimately achieving investment-grade financial metrics over time, but also see the ability to deploy free cash flow for the benefit of our strategy and our shareholders. Therefore, as you would have seen earlier today, we have filed and announced an NCIB share buyback program, which allows the company to repurchase up to 1.5 million shares over the course of the next 12 months. I'd like now to turn to my final slide, Slide 17, and summarize our 2023 outlook. Given our robust backlog and strong pipeline of opportunities in SNCL Services, we are expecting our organic revenue growth to be between 5% and 7% in 2023 compared to 2022, slightly higher than our 2022 to 2024 annual financial target. SNCL Services should also continue to deliver strong segment adjusted and segment adjusted EBITDA to net revenue margins in the range of 8% to 10% and 14% to 16%, respectively. And as mentioned, we expect net cash from operating activity to be positive in the second half of the year. With that, I'll now hand the presentation back to Ian.

Thanks, Jeff. Our core business is executing well. We continue to do what we said we would do, and we remain laser-focused on executing our pivoting to growth strategy. We are delivering strong financial performance with a notable backlog expansion in engineering services and have a strong pipeline of new opportunities in nuclear. Recent results further demonstrate the resiliency of our go-forward business and the ability to grow in the current macro environment. We are strongly positioned with a leading presence across our core markets of Canada, the U.S. and the U.K. We continue to see several opportunities for long-term value creation for SNC-Lavalin across these core geographies and our end markets. Infrastructure investments by governments and the resurgence of the nuclear market around the gold show continued signs of growth. And as I previously noted, we are undertaking a strategic review to optimize our portfolio of businesses, including Linxon. We will be diligent in our approach, and we will provide an update when applicable on the development of our review. We achieved a major milestone for our company with our 2 Ontario LSTK projects now largely physically complete. REM continues to progress well, and we're also continuing our discussions with our customers to recoup the total cash out for the work we have completed. I say this every quarter, but it really is an exciting time to be part of SNC-Lavalin. Thank you, and we will now open the call for questions.

[Operator Instructions] Our first question comes from Yuri Lynk of Canaccord Genuity.

Ian, on LSTK, what -- can you put a little more meat on the bone in terms of the milestone? And I'm asking this question in the context of looking over the last couple of quarters on Eglinton, for example, you've been 90%, 95% complete with 100-some-odd million in backlog for 3 or 4 quarters now. So and suffered write downs along the way. So what's changed such that we're going to see that backlog actually go to 0 and this thing finally be put to bed.

Yes. Yes. No, that's a good question. And I actually see the way forward really, really clearly. And I'll try and explain why we expect, not to have any more material risk going forward. When I say the physical work is largely complete. What that means to us is that the risk element of the job, the construction work where we've seen these issues unfold in the post-pandemic world as far as cost overruns in inflation and labor and materials supply chain disruption and trying to get materials over from overseas, the strikes that we've had and all of those productivity issues that we've had through the pandemic and post-pandemic, I see that as done. And that was all attributed to the construction element of these projects. And what we did in this last forecast is a set obviously, the impact of all of that in Q4, but also assess the small remaining part of the construction work. And as we're at the end, that's pretty easy to predict and reforecast to the end point. Now as you rightly say, these projects are not 100% complete. But the remaining work on these projects, I see as professional services work. And that work includes the testing and commissioning. It includes putting all the documentation together and handing that documentation over to the client. But it includes getting the safety permits for the operation of the railways include result of regulatory approvals and getting occupation permits for the stations. And then we have to agree with the client hand the asset over, train over all their people, the drivers because we don't drive these trains and get the system bedded down into an operation and maintenance. So all of that work is not construction work, that's professional services work, and you'll see these assets going into operation in the second half of this year. So for that reason, we feel we're in a very different situation than we've seen in the past on these 2 projects.

Okay. So all we should see going forward for this year is the overhead losses about $40 million, $45 million negative EBIT. That's what you're saying?

Yes. And truly, the overhead is to support everything I've just said, but it's also to support the recovery of our losses in the negotiations and the rigorous kind of pursuit of getting our money back from our claims. So that kind of run rate that you'll see is $10 million-ish every quarter is to enable us to make sure we close out the projects, both from an operational perspective but also from a commercial perspective.

Okay. Second question, just on Engineering Services. Good results outside of Linxon. But just a bigger picture, I mean, almost all of your peers in engineering services have increased their EBITDA margins over the last 2, 3, 4, 5 years with plans for continued improvement in '23. You seem to be a bit of an outlier in that respect. So can you just talk about the reason for that and how we should think about the ability to improve margins over time?

Yes. Yes, for sure. I mean we certainly have significant parts of our services -- engineering services business that operate at the same level of margins and operate at the same level of cash conversion, et cetera, et cetera. But there are parts of the business, which don't -- and part of the strategic review is looking at that and making sure that we have a very achievable plan to get those parts of the business to the same or exceed our peer groups or take another decision on them and take a different route. So we're really, really focused and committed into getting the whole of the Engineering Services business up to the same or better metrics that you'll see through our peer group.

Our next question comes from Jacob Bout of CIBC.

This is Rahul on for Jacob. So I just had a question on the strategic review. And it would be helpful if you could shed some more color on this. You mentioned specifically that Linxon is part of the review. Should we read that as you're considering a potential sale of this business or exiting certain regions? I'm just trying to understand the strategic rationale.

Yes. Sure. Sure. I mean, the strategic review is really about portfolio optimization. And so the comment I made just a moment ago, clearly, we won to be performing in all of our businesses at the highest performance that we see in the industry. I mean that's our goal. That's what is at the heart of the review in its entirety. Our markets are really strong. So if you look at the industry as a whole, the markets are almost [ stole ] stripping supply. So it's really important we see where we operate and who we operate with as far as clients and governments that were positioned in the best possible place using our capital and our human resource to optimize value creation. I mean, that's really in summary. Now on the specifics, we will Yes, Linxon is part of the review. Clearly, we are disappointed in the Linxon performance. The first thing we need to do is the Linxon business is get it back to profitability, which we believe we can. And the second is to review all options. I mean nothing is off the table with respect to Linxon specifically And [I repeat] the whole strategic review, it's about maximizing profitability, cash flows and growth.

And maybe just going back to the LSTK. Maybe if you can just update us on how you currently stand in terms of that previously provided maximum risk envelope of $300 million? And is the remaining risk in your view, contained within that $300 million envelope?

So the remaining risk absolutely is contained within that envelope. At the end of 2022, we were at [ $217 million ] of the $300 million. But what I would reiterate is what I said, in the previous question and also in the presentation, we don't expect any further material risk going forward other than the overhead run rate that we've articulated.

Our next question comes from Devin Dodge of BMO Capital Markets.

Maybe a question for Jeff here. Just on the cash flow guidance in 2023, look negative in the first half, positive in the second half. Are you able to put some numbers or goalpost around -- what that could mean for the full year? .

Yes. Let me make a couple of comments to that. I mean, I think as you heard us say, we expect it to be negative in the first half of the year. We've got to pay out the supply chain on construction costs. So there is a delay in that versus where we are from a P&L perspective. And also, there's the cost around testing and commissioning and the professional services element Ian talked about. I would expect that to largely look in the first half of 2023 pretty similarly to what we saw in the first half of 2022 in terms of the LSTK cash flow usage, which was roughly $250 million. And then as we said, as in the second half of the year, we're turning those, we're wrapping those up, returning those over to customers, the natural cash flow generation ability of the go-forward business will obviously continue to come through, but without the drag of LSTK. I think the other thing I'd say is that -- and you've heard Ian talk about, we're putting a lot of effort into trying to resolve these claims with customers. And that possibly gives us additional upside in the year from a cash flow perspective. So we're not going to provide any kind of specific number or guidance, but that's very much how we see the shape of the cash flow over 2023.

Okay. That's good color. Okay. And then I was going to ask about the nuclear question on the nuclear business. So there's -- I think there's a couple of good-sized projects with the DOE in the U.S. that are set to expire in 2023. Do you think SNC is in a good position to be awarded the replacement contracts for those opportunities?

Well, one never knows. And clearly, we are always rebidding these DOE contracts in the U.S. They often come up for renewal and we often revisit them. And they're done in consortium with other partners. There is a large one-off for rebid right now that we feel. We have a great team, a great set of partners and a great value proposition. But you can never really predict the outcome of these things until the award is done. But they often come up for renewal, and there are several DOE contracts across the country and the different nuclear sites. So as you lose one, you win another. So it generally levels out and we've had a fairly consistent waste cleanup business across the U.S. and our actions nuclear secured business for some time, but be sure as soon as we win, what we'll be announcing it. Thank you.

Our next question comes from Chris Murray of ATB Capital Markets.

Just maybe turning back to the U.S. engineering business. Some of your peers have talked about the fact that some of the new funding coming through. They're looking for organic growth in the low double-digit type number. And I appreciate you guys have laid out organic growth number kind of in the 5% to 7% range. But when I think about the portfolio, and this is maybe kind of near term and very specific, and not a longer-term goal. But is there any reason to believe that you guys shouldn't be able to benefit from some of these new funding sources, particularly in the U.S. or the U.K.

Yes. Yes. No, that's a good question. And we've clearly done a lot of analysis on this as our land and expand strategy that we talked about in the Investor Day and following through on that land and expand strategy, particularly the Infrastructure Investment Jobs Act and the Inflation Reduction Act, we're actually seeing funds flowing through the states now, particularly from the [ IGA ]. And we see this -- I mean these are very, very significant sums of money that are committed over a decade. And we see a lot of it flowing through the transport side. We're seeing some of it now flow through the energy transition side. And we're also seeing quite a negative flow into what I would call like water and environmental programs, not just water quality, but also flip defense and flood remediation drainage, et cetera, from a resilience perspective. And you might have seen they actually won a few jobs in our core states from a flood mapping and a flood control perspective, which were good wins in Q4. But where we're at is I've said it before and it still stays the same. And [Texas for] Nevada, Colorado, Georgia, North Carolina, we operate at Tier 1. Our issue is that's on a handful of states, and our peers are operating in all states. So we've got to move the business from where it is today to future plays [ or ] equivalent to our peers. Now we have landed and expanded in the Northeast states, New York, Virginia, Pennsylvania, Illinois. We have landed in Washington State, and we've landed in California. Now that was the work that we were doing last year. We're winning work, and we're seeing growth from that. So I think that our plan and our future is obviously because of our size, I think developed a very significant opportunity to get higher growth rates than you would normally see from an organic perspective. So it's pretty -- we're pretty pleased with where this is going right now.

Okay. That's helpful. And then one other question on LSTK. And maybe let's just assume that everything on the 2 Ontario projects works out and by midyear, we're kind of where you expect you're going to be -- how do we think about the rest of the runoff? And I guess it's really only the REM project at this point. Should we be thinking that there'll be any contribution on cash flows? Or should we kind of be thinking that 20 -- like the back half of '23 and into '24 as you run off the rest of this project. It will keep digging a bit of a hole that you're going to have to overcome or should it really get back to neutral?

Maybe we'll go on to this. I mean I'll kick off by saying, the REM project has not been one of our challenging projects. I mean it's always progressed well. We're happy with the performance. Yes, it does give a contribution. And it's really been about the physical construction work that has given us the challenge in exiting the LSTK work on the 2 Ontario project. So that's kind of the overview. But I don't know, Jeff, if you want to talk specifically on cash flow then?

No, I would just add, I think in I don't necessarily want to get into 2024 guidance at this point. But I think the overhead costs that we have this year that we've talked about, those will clearly reduce towards the end of the year as those 2 Ontario projects go away to, I would expect a largely immaterial amount. And as Ian has already said, the REM project generates a positive contribution. So I think that probably gives you the sense of where we think that's headed post 2023.

Our next question comes from Benoit Poirier of Desjardins.

Yes. If we come back on the strategic review, could you maybe provide some color on what it doesn't include? And do you see an opportunity to maybe monetize some assets that you have in your capital portfolio, such as the Highway 407?

Yes. Yes. Thanks. So it really -- it's kind of looking at everything. I mean, you'll see from a -- and I will repeat myself about the portfolio optimization, but the goal here is to maximize profitability, cash flows and growth. That's the goal, create the most value we can with the capabilities that we have, the strong markets that we see ahead of us, and that's the heart of the review. So Capital is absolutely part of the review. You will have seen that in '22, we recycled called the John Hart asset. You'll have seen we recycle the Carlyle investment fund that we had. So capital is part of the asset. I mean, specifically on the 407, this has been a very valuable asset for the company. It's obviously clearly a really good asset. It's been a very important part of the overall portfolio of the company, particularly as we have had challenges with LSTK and challenges with cash flows from executing and exiting the LSTK part of the business. As we move to normalized free cash flows in the SNCL Services business and positive free cash flows perhaps the importance of the 407 becomes less. But when we reach that time, and I don't think we're at that time now, when we reach that time, we'll definitely be reviewing the long-term kind of position that we feel on the 407. I wouldn't say it's in the review immediately, but there will be a time where it will be in the review.

Okay. And just in terms of capital deployment, Jeff, could you maybe talk about how the NCIB compare with other opportunities you might have given your leverage ratio right now and also the higher interest rate environment.

Yes. Happy to, Benoit. Yes. So first of all, we think the NCIB fits absolutely within the capital allocation framework and priorities that we laid out at our Investor Day here in September 2021. And just as a reminder, it was about balance sheet strength and improving the balance sheet to financial grade metrics. And then also the potential of either investing to further accelerate our growth strategy, our return funds to shareholders. And our view was we could do more than one of those things at the same time. And our view, as we move the business to its go-forward state, which is a positive cash-generative business here in the second half of the year and beyond. Our view is we're very much on track to deliver investment-grade financial metrics over the time frame that we had envisioned and also gives us the opportunity, we think, to deploy some additional capital. And so the NCIB really ensures that we have the ability to access all of those capital allocation priorities that we laid out. And clearly, at current levels of the share price, it's -- we see a lot of value in our shares and our company going forward, and we think that gives us good optionality going forward.

And I'll probably just build on that, the optionality is important, not only for the strategic review and any recycled Capital that might come out of that. It's also important in case we achieved success on recovering our losses in a short time frame from our [TK contract]. I mean we are pursuing the recovery of those losses very, very rigorously. And if we can get a negotiated outcome, but all of those will be positive cash inflows.

Okay. And maybe just a quick one. Any color about the timing to recover those costs? .

Well, that's the issue, isn't it? I mean in any negotiation, there's 2 part and the parties have got to get to an agreed position. So we are in very detailed and collaborative discussions, but I can't predict the outcome. I mean, I genuinely can't. I mean it could happen. In the short term, it could take longer. At the worst-case scenario, it could take some litigation. I would hope not, because we feel we've done a great job on these projects, and we feel we need to recover the loss.

Our next question comes from Michael Tupholme of TD Securities.

Regarding the nuclear segment, strong margins in the quarter, I think it was about 18%, that is above what you've historically talked about that segment as sort of being the target margin range. So I guess the question is, can you talk a little bit about what happened in the quarter? What drove the margins? And how we should be thinking about that segment going forward?

So let me talk about kind of macro level first, if I can. The change in the nuclear sector over the last 12 months has been pretty dramatic that the resurgence of nuclear New Build power as a genuine green power and an alternative to other forms of green power is becoming a real realization to governments. And we're seeing across the industry, increased activity, increased interest, but also real, real opportunities. And you have seen the announcement that we made on the small modular reactor at Darlington. So clearly, the industry is about to take off and launch into a pre fabulous opportunity, particularly for SNC-Lavalin. And because we have the right to the can do technology, we feel the candy technology is a good new build technology for large nuclear reactor, but we're also helping other technologies on the small modular reactor side, notably GE, it's actually where we've won that contract. I think that there are specific nuances to Q4, which drove the margins up on particular projects. And I wouldn't see the general run rate of the business in the medium to long term should be different than what we've seen in the past within the range that we've got out there. And Jeff, I don't know if you want to add something to that?

No, I don't think I'd add anything material to that. And you're absolutely right, it is closing out some projects at the end and some strong kind of cost control. But to your point, we've typically operated mid to the -- mid to high end of our target range. And I think that would be the range, at least at this point, we'd be forecasting going forward.

We'll confirm that for '23.

Okay. Perfect. And then just a couple of additional questions on the LSTK project side. The backlog there was up slightly, and I think you explained why that was the case. But with the 2 Ontario projects being largely on physical construction, like at what point do we start to see you get past the point where backlog increases in that area or even sort of a possibility? Does the REM project still potentially drive those? Or just trying to think about how we should expect that to play out.

I think -- it's Jeff. It's certainly around the 2 Ontario projects, we would expect to see that backlog working down quarter-by-quarter to the project to wrap up later this year and are handed over. I think on REM, we continue to see very steady progress on that project, and we wouldn't expect any kind of material change to that direction of travel in terms of the backlog work of a little higher. We do a little more work in some quarters, a little less cost move around a little bit. But we would expect to see as it has been a fairly consistent working off of that backlog as we progress.

Okay. That's helpful. And then just a clarification on the prospect of claims recoveries. Ian, I take your point that predicting the timing of that is extremely challenging. But just to be clear, are the recoveries that you're seeking? Are these in relation specifically to the 2 Ontario LSTK projects? Or are there other projects past LSTK projects that you're still pursuing claims recoveries in relation to?

No. There are past projects also that we're still pursuing. I mean I can't really go into the final details of each project because, obviously, some of these negotiations are confidential, but it's beyond the 2, yes.

Our next question comes from Maxim Sytchev of National Bank Financial.

Jeff, I guess I had a question in terms of sort of the pacing of cash flow drag in H1 because if we're in commission right now. So why is the drag kind of similar to last year. I mean, is it predicated on the milestone dynamic? Or how should we think about this?

Yes. It's a bit about milestones, Max. Frankly, it's a bit about -- or is a lot about just paying out the supply chain for the construction work that's been done, and it's just around the payment terms of that. So that flows into Q1 and a bit of Q2, and then you add in the sort of finishing off of testing and commissioning and punch listing and all those things Ian talked about. So that's why it's really just that delay between what you're recognizing from a profit and loss perspective and what you're actually paying out as part of the cash flow of the project.

Okay. And REM has a different cash flow profile? .

It's one that has a much more, I would say, balanced cash flow profile in terms of the way it's been set up and running. So it's largely -- hasn't had the same sort of issues and hasn't been the same sort of financial drag just in terms of its setup, also over and above, as Ian said, it's been progressing very well and remains a positive contribution to the group. So it has a fundamentally different kind of cash impact than the other 2 projects.

Okay. Okay. Fair enough. And then just 1 question for you, more so from a strategy perspective. So let's say like if we port ourselves in the future as the [ keys ] done. You kind of talk about loan and expand strategy. Just curious, you sort of saw process around kind of counterbalancing the investor fatigue, which is represented in a pretty low trading multiple and some discussion around M&A and things like that. So yes, just curious what your thoughts on there.

Max, in terms of -- the question is around the strategy going forward and how we think about the engineer, the services business from that perspective. Sorry, did I get you correct?

Yes. Yes.

Okay. Okay. So I mean, clearly, we have consistently performing, growing engineering services business. We intend to continue to improve the performance of the business in all metrics, whether that's growth, profitability or cash flows. And because we see the market particularly the markets where we have chosen to operate is so strong. We will continue to look to make sure that we are positioned in fast growing markets and that we have the ability to leverage our local and global capability to customers and governments that we have strong relationships with. So the plan going forward for example, the U.S. plan is a very, very specific plan to maximize our growth potential, stay consistent or improved. And we take that approach to all our geographies. I mean Canada is very, very focused. The U.K. is focused on keeping its leadership position. U.S. is focused on growth. And we're active, we're seeing some pretty exciting opportunities in the Middle East right now. And you'll have seen maybe an uptick in our growth and backlog in the Middle East as well. So all in all, pretty good markets, pretty good capability. I think we've got the right plan. M&A, for sure, on a tuck-in perspective to help us build out some platforms and further relationships when the time is right and the capital is available, and it's the right time to deploy that. But it's all a step-by-step process, right?

Our next question comes from Frederic Bastien of Raymond James.

My question revolves around what was just discussed with MAX. When do you expect to be in a position to dial up growth by acquisition based on what I heard around the timing of cash flows, NCIB and the internal review, it feels like it won't be until next year at the earliest. So I just wanted to get your views here.

It's Jeff. I think we've always said very much linked to our ability to consistently deliver positive operating cash flow. So I think that opportunity begins to exist in the second half of the year. But as we've said, we'll look to look at what creates the most value for shareholders over that time. And that's partly for having an NCIB program is to make sure that we have and are available to compare opportunities that way. So I think we could see the opportunity later this year, certainly as we move into 2024.

This concludes the question-and-answer session. I would like to turn the conference back over to Denis Jasmin for any closing remarks.

Thank you very much, everyone, for joining us today. If you have any further questions, please don't hesitate to contact me. Thank you very much, a good day and a good weekend. Bye-bye everyone.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.